Does operating performance increase post-takeover for UK takeovers?
Table 2 (continued) Independent Industry-adjusted median Industry, size and pre-performance adjusted variables IAOP1 IAOP2 ISPAOP1 ISPAOP2 (1) (2) (3) (4) (5) (6) (7) (8) Panel D: median pre- and post-takeover cash flows (accruals) relative to total sales Controls Cash 0.024 0.000 0.030 0.002 (1.08) (0.15) (1.09) (0.07) Disciplining 0.003 0.024** 0.004 0.035** (0.21) (2.03) (0.20) (2.05) IND-relatedness 0.013 0.011 0.005 0.006 (0.97) (1.07) (0.27) (0.45) Size 0.034 0.012 0.037 0.031 (1.23) (0.73) (1.06) (1.08) F-statistic 31.46*** 8.77*** 78.07*** 17.41*** 8.85*** 3.59*** 8.99*** 5.26 *** p-value (0.000) (0.000) (0.000) (0.000) (0.003) (0.004) (0.003) (0.000) Adjusted R 2 0.14 0.17 0.29 0.30 0.04 0.06 0.04 0.10 Operating cash flows are defined as pre-depreciated profit adjusted for short-term accruals (IAOP1 and ISPAOP1) and as pre-depreciated profit (IAOP2 and ISPAOP2). Industry-adjusted measures (IAOP1 and IAOP2) are defined as the raw performance measure for each firm less the median industry performance measure for each firm. Industry, size and pre-performance adjusted measures (ISPAOP1 and ISPAOP2) are defined as the raw performance measure for each firm less the performance of a control firm matched according to industry, size and pre-performance, measured in the year prior to takeover. In Panels A and B, the asset base is total market value, which is the sum of the market value of equity plus the book value of debt and preferred stock. For Panel B, the total market value in the post-takeover years is reduced by the combined market adjusted gains attributable to the target and acquirer firms. In Panels C and D, the asset base is the book value of total assets and total sales, respectively. The control variable cash takes the value 1 if cash was used as the only form of consideration in financing the takeover. The control variable disciplining takes the value 1 if the takeover is disciplining. Disciplining takeovers are defined as those in which the chief executive officer is removed (nonroutine departure) in the 12 months following the takeover. The control variable IND-relatedness takes the value 1 if both target and acquirer belong to the same industrial grouping as that defined by the Financial Times All Share Index. The control variable size is the relative target size measured as the target total market value divided by the acquirer total market value at the financial year prior to the takeover completion (t 1). Numbers in parentheses are t-statistics, unless otherwise stated. ***, **, * denote statistical significance using a two-tailed test at the 1%, 5% and 10% levels, respectively. All t-statistics are computed using White (1980) correction for an unknown form of heteroscedasticity. 308 R.G. Powell, A.W. Stark / Journal of Corporate Finance 11 (2005) 293–317
The association between pre- and post-takeover performance also appears to be strong with statistically significant slope coefficients. The only exception to this is when an industry, size and pre-performance benchmark is combined with a ‘pure’ cash flow measure of performance and book value of assets is used as the deflator. The coefficient of pretakeover performance is substantially less than one in all cases. If the modeling structure performance is accepted, this suggests that excess performance, whatever the benchmark, disappears over time. When examining the results for models 2, 4, 6 and 8, there is little of any consistency. For example, when adjusted TMV is employed as deflator, none of the control variables have a significant ability to explain post-takeover performance. When either book value of assets or sales are used as deflator, some of the control variables appear to have explanatory power for post-takeover performance. Nonetheless, no variable has consistent explanatory power across performance measures. Further, even for these deflators, only whether the takeover is disciplinary has a consistent effect for a single performance measure (IAOP2). Overall, the results presented in Table 2, as indicated by the results for models 1, 3, 5 and 7, provide evidence of significant improvements in the operating performance of acquiring firms post-takeover. 12 The size of the estimates, however, shows some sensitivity to the measure of operating cash flows and deflator employed. The conclusion that takeovers generate operating performance improvements is perhaps supported more by the use of an accruals definition of operating cash flow. Furthermore, the impact of pretakeover performance on post-takeover performance is generally more pronounced and significant when we use the accruals definition of operating cash flow, as evaluated by the degree of explanatory power for the estimated equations. The use of industry or industry, size and pre-performance benchmarks does not seem to impact greatly on our conclusions, in terms of the existence of performance improvements. As a general rule, however, the size of the estimates of performance improvements are higher when the benchmark for performance adjusts for the impacts of industry, firm size, and pre-takeover performance than when industry is the only factor adjusted for. The results for models 2, 4, 6 and 8 provide little consistent evidence across deflator and performance measure choice that (i) the form of payment; (ii) whether the takeover is disciplinary; (iii) the degree of industry relatedness for the takeover; (iv) and the relative size of target and acquirer have the ability to explain post-takeover performance, once pre-takeover performance is controlled for. 4.2. The change model R.G. Powell, A.W. Stark / Journal of Corporate Finance 11 (2005) 293–317 309 Table 3 provides the results of examining the average size of performance improvements measured as the difference between post-takeover performance and the combined target and acquirer pre-takeover performance, using different benchmarks and scaling 12 Following Belsley, Kuh and Welsch (1980), we test for the influence of outliers by plotting the standardized residuals for each regression. Values greater than two indicate possible outliers. The results reveal one outlier when sales is used as the scaling metric—Daily Mail and General’s takeover of Hobson’s publishing in 1990. Combined operating performance (OP1) to sales in the year prior to takeover was a staggering 1.231% compared to only 15% in the year after takeover. The huge operating sales margin prior to takeover was the result of near zero sales reported for Daily Mail and General. This observation was dropped for all analysis using sales as a scaling metric.